Your country is well known for its successful transition from hardship to prosperity and technological prowess. This amazing transformation and strong economic performance have allowed Korea to make important progress also in the social sphere. However, like most of the members of the OECD, Korea still faces significant challenges to building an equitable and inclusive society.

Our new OECD report on Strengthening Social Cohesion in Korea aims to help Korean policymakers confront these challenges. The report address one key question: how to sustain strong economic growth while improving social cohesion in the context of a severe demographic transition? I would like to take this opportunity to thank the Korean Development Institute and the Korean Government for their strong support throughout the preparation of this report.

Let me share with you some of its key insights.

Korea: a story of rapid and sustained economic success.

Korea’s economic progress over the past decades has been among the most rapid and sustained ever seen, in terms not only of the pace of convergence of living standards towards the OECD average, but also because of the extent and depth of societal change. Real GDP has risen by more than 4% per annum during the past decade, which resulted in an impressive narrowing of the per capita income gap with the United States from 62% in 1991 to only 36% in 2010.

Korea has also become a success story by fuelling economic growth through innovation, and now also through green growth. With high levels of R&D expenditure, a highly educated labour force, improved framework conditions for innovation, large knowledge-intensive and internationally competitive firms and a strong ICT infrastructure, Korea has become one of the world’s most dynamic exporters. And one of the world pioneers in green innovation, powered by a Five-Year Plan with public spending of 2% of GDP per year to promote green growth.

These new sources of growth have helped to improve social cohesion, especially in the last few years. However, Korea still faces important social challenges. Despite impressive economic growth, income inequality has risen over the past 15 years. And relative poverty has been on the rise, reaching 15% in 2009, the eighth highest in the OECD.

Several well-being indicators point to tensions in the Korean economy and society.

Korea, for example has the lowest birth rate in the OECD, with two parents replacing themselves in the next generation by little more than one child. This means that the country is facing one of the toughest demographic transitions among OECD countries. It also points to a complex social context in which many cannot easily combine their family life with their work aspirations, forcing them to make difficult choices between their professional and domestic lives. This is particularly true in the case of women.There are also strong signs that the important progress that Korea has made in education has not translated fully into better labour market conditions. This reflects the legacy of Korea’s “culture” of working very long hours, which makes it difficult to combine labour and family responsibilities, and again limits the access of women to mainstream jobs.

Female labour force participation is indeed a serious concern, with rates about the same today as 20 years ago. Only 10% of all managerial positions are held by women, compared with about one third across the OECD. And there is a huge gap in pay – about 39! – between men and women with comparable skills working full time, the highest among OECD countries. The statistic for older workers is also disturbing. The poverty rate for older workers is one of the highest in the OECD. It will get worse if policy actions are not implemented.

Addressing these and other pressing social challenges is essential for building a more inclusive society, and it is also crucial for sustaining economic growth. Our report, Strengthening Social Cohesion in Korea, identifies six mutually reinforcing areas to concentrate reform efforts.

Six policy initiatives for better social cohesion

First, economic growth is essential to social cohesion. It boosts employment while generating the tax revenues necessary to finance social programmes. Sustaining output growth in Korea requires improving labour productivity while encouraging higher participation, particularly of women. Given that productivity is relatively high in the manufacturing sector, priority should be given to services.

Second, strengthening social cohesion also requires scaling up public social spending. Access to the three main pillars of the social safety net – the National Basic Livelihood Security Programme, the Employment Insurance and the Earned Income Tax Credit (EITC) – must be improved for those at risk of poverty. Strengthening work incentives will also help.

How can Korea afford this? Consumption taxes are an effective way to boost tax revenues, because they impose fewer distortions than direct taxes. Korea has considerable scope to hike its value-added tax (VAT) rate, which is well below the OECD average of 19%. For low income households, a VAT rise could be offset by expanding earned income tax credits and through well targeted social spending. Social justice is best achieved through the expenditure side of the budget, not through the tax system.

Third, we strongly advocate policies that will encourage a shift from non-regular to regular employment. This will drive growth by giving rise to a better trained and motivated workforce, and it would improve equity by reducing wage disparities. To achieve this goal it is necessary to further relax employment protection for permanent workers while reducing incentives for firms to hire non-regular workers.

Korea has advanced on this. Recent labour market reforms have provided greater employment protection for non-regular workers, enhancing their job security whilst reducing incentives for employers to rely on precarious forms of employment. However, there remains ample room for better harmonisation of employment protection across different types of non-regular work.

Fourth, women, youth and older workers need greater access to productive employment. Recently Korea has taken promising measures to this end, but additional measures are needed to change strongly engrained labour market practices – such as long working hours for regular workers and forced early retirement. It will also be necessary to take a hard look at some cultural norms, such as the high value Koreans place on formal academic study vis-à-vis vocational education. On another critical challenge, promoting female labour force participation, while boosting fertility rates, requires quality and affordable child care, family-friendly policies and reducing inequalities in gender pay. There lies our only chance of reversing, or at least slowing, the ageing process.

Fifth, education reforms are needed to promote inclusive growth, including better access of low-income children to high-quality early childhood education and care (ECEC); reducing reliance on private tutoring, notably at hagwons, and expanding loans to university students with repayment contingent on income after graduation.

Finally, primary health care must be strengthened. Low-income households are currently discouraged from seeking such care by high co-payment rates. Moving away from a hospital-centred health system to one based on primary care would help to reverse this and improve health outcomes. Developing a strong primary care system will require effective working models of community-oriented group practices, with many specialities. Strong primary care will also need central government support, particularly to finance new centres.

Ladies and Gentlemen,

Strong and sustained economic growth is the first requirement to foster social cohesion, but it is not enough. It is the quality of our social policies that makes the difference.

Korea is facing significant demographic changes. Its population, which is currently one of the youngest in the OECD, will be the second oldest by 2050. This will greatly reduce Korea’s ability to steam ahead in its development at the current pace. For both equity and the economy, it is essential to tackle income inequality and poverty, and encourage women and youth to add their talents to Korea’s labour force. The recommendations of the OECD will help to open doors for youth, for women, and for low-income individuals to contribute to Korea’s future growth.

We aim to help Korea design and implement better policies for better lives.